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5 credit card terms that can cost you

Credit card companies are in business to make money, and in an effort to do so, they have a language all their own that you need to understand. Too many card holders find out, after the fact, that misunderstood credit card terminology can cost them money.

Below are a few common terms you may want to examine more closely when shopping for credit cards.

  1. The APR (Annual Percentage Rate)

    Essentially, the APR is the interest rate, calculated on a yearly basis. Comparing the APR of competing credit cards lets you determine which card is appropriate for your financial circumstances.

    What many people misunderstand is that the APR is not always the same for each feature. For example, your 17 percent rate may be for regular purchases, but should you need a cash advance, you may have a 19 percent rate, and should you have a bank transfer it may come at a 21 percent rate.

    You need to consider what you will need in a credit card and not assume that the 17 percent rate is across the board. Additionally, by not choosing a fixed rate, you run the risk of the rates rising, which can be quite costly.

  2. Introductory rate

    This is where millions of people get caught every year; they jump at a really great introductory rate only to be socked by a much higher rate down the road. If you're carrying a balance, you'll be in for a rude awakening when that amazing 2 percent rate suddenly becomes 22 percent six months later.

  3. Minimum payments

    This sounds simple enough, make the minimum payment, and you can keep on using the card. What isn't as clearly conveyed, is that the balance growing continues to spiral at a high interest rate, which will get you into long-term trouble. Credit card balances multiply extremely fast when only the minimum payment is made.

    Let's say you have a $1,000 balance on your credit card, an 18 percent APR, and you pay the minimum $25 per month: It will take you nearly 9.5 years to pay off the balance, and you would be paying over $900 in interest.

    However, if you were paying $75 per month, you would pay off the balance in 15 months, and the interest would be just shy of $125. Misunderstanding the minimum balance by thinking it is a way of keeping your monthly payments down, is a big mistake.

  4. Settlement offer

    Also known as a discount offer, this is a misunderstood term that needs more explanation. "If, for example, you owe $1,000 but reach an agreement that you can pay $600, that may not be the end of the story," explains Dorothy Barrick of GreenPath debt solutions. "A future vendor may require you to pay it in the future or paying back the remaining $400 could be a condition for new financing," adds Barrick, recommending that you learn more details about the settlement offer.

  5. Balance transfer fees

    A growing number of people look to transfer several balances onto one card, which can be a positive if the rate is lower and will stay lower for the life of the balance. However, a balance transfer fee can eat into whatever you are saving.

    If you are transferring several card balances onto one card, you are also encountering several transfer fees. These can be set fees or a percentage of the balance owed. If the balance is high, fees based on a percentage of that balance may also be high. In the end, you may not be gaining anything. People often misunderstand these as minor fees, and they don't catch that the fees may add up to more than they bargained for.

To keep your credit in good standing, always make sure to read and compare all the details of credit card offers that you're considering.

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